As SAIL's modernisation draws to a close, it faces new challenge

It must educate buyers about differentiating properties of its products from that are in the market

A common feature in public sector undertakings, which have close to a 16 per cent share of the country’s gross domestic product, is to postpone taking decisive action at early stages of a crisis. Take Steel Authority of India (SAIL) – it would have been able to give a better account of itself during 2016-17, taking advantage of improved metal prices, had the management corrected course at the first signs of shrinking margins.

The global steel meltdown started in the beginning of 2014 with prices sinking to 12-year lows in December 2015. The demand sluggishness resulted in over 600 million tonnes (mt) of surplus capacity worldwide, half of which is in China. That apart, slippages in completing SAIL’s Rs 72,000-crore modernisation and expansion caused great dismay to the government. In the disquieting circumstances, the steel ministry decided to move P K Singh from the Durgapur steel plant to the SAIL chairman’s office in December 2015 with the brief to turn around the fortunes of the company and hasten completion of crude steel capacity expansion to 21.4 mt from 12.8 mt.

What does the report card after over a year and a half say about SAIL’s performance under Singh’s stewardship? From a net loss of over Rs 4,100 crore during 2015-16, the company managed to remain positive on earnings before interest, depreciation, tax and amortisation (EBITDA) for four quarters in a row till March 2017. To put it in perspective, SAIL’s EBITDA fell every year since 2010-11 before it became hugely negative in 2015-16. Singh claims last year’s margins would have been better but for the extra Rs 4,300 crore that SAIL spent on metallurgical coal, neutralising the “significant improvement in net sales realisations.”  

Driven by the belief that hard times call for hard measures, Singh saw to it that SAIL operations were pitched to increasingly higher techno-economic parameters such as better coke rate, higher blast furnace output and continuous improvement in productivity in terms of crude steel output per employee. Good progress was made on all these counts last year, as it should have since SAIL now has the benefit of its mills coming close to the end of modernisation and expansion. For example, the new and large blast furnaces should work with efficiency comparable to the best in the world. The new-generation blast furnaces will allow high degrees of auxiliary fuel injection, leading to the comparatively low use of coking coal.

After a good number of annoying slippages, the Rs 72,000-crore modernisation and expansion, which includes Rs 10,000 crore in mines to reinforce raw material security, should finally be over by 2017-18. Bringing the new machines to their rated capacity by way of ramping up will, however, take time. But all the SAIL units being decades old, except the century-old IISCO plant at Burnpur which has made way for a new mill to make long products, the remaining old machinery will come for periodic refurbishing and replacement. So, modernisation will be a continuing process with SAIL as is the case with mills of similar vintage elsewhere in the world.

  

Some private sector steel makers have overshadowed SAIL in promoting and selling their products, even while these do not have claims to a quality edge. Singh says as “the company’s output from here will continue to rise along with the introduction of new finished products, SAIL has the challenge to see that these are received well and absorbed by the market.” The company has a new commercial director brought from the National Aluminium Company whose principal mandate is to ensure best value realisation for all SAIL products and be the live link between the market and production units. 

Singh has sought inputs from The Boston Consulting Group to reshape the company’s marketing strategy. For the current year, SAIL’s target is to make 15 mt of saleable steel, with value-added products from the new universal rail mill at Bhilai, cold rolling mill at Bokaro, structural mills at Burnpur and Durgapur and the plate mill at Rourkela. Steel users need to be educated about the “properties” differentiating all these products from SAIL’s reborn mills from what are now available in the market. That’s no mean challenge for SAIL.

With the commissioning of the 1.2 mt universal rail mill, SAIL has the capacity to make annually 2 mt of rails at one site, which is globally unmatched.  In Indian Railways, which have an ambitious programme to replace old tracks and lay new ones, SAIL finds a customer with a great appetite for rails.

It does not befit SAIL that it continues to sell semis in the form of blooms, billets and slabs in the market to re-rollers who make finished products such as structurals, rounds, rebars and wire rods. Singh admits that by feeding re-rollers with semis, SAIL is creating competition for itself. Now driven by a compulsion to secure better margins, the company has decided to totally phase out selling of semis in the next couple of years. Every unit of steel made will get value added majorly at in-house finishing mills. Some portions of semis could also be made into finished products by outside units on conversion cost basis under strict SAIL vigil on quality.

SAIL using outside mills to make finished products for it on a captive basis is like Tata Steel getting doors made by independent converters. Both SAIL and Tata Steel should be driven by the singular objective of finding newer applications for the meta and at the same time ensuring that steel does not get replaced by aluminium or composites in any area.